Monday, November 26, 2007

Why Tie Showing to Selling?

The usual way to shop for a new car involves visiting lots of dealers, each of which lets you test drive and tries to sell you one or more of its models. Long ago, it occurred to me to wonder why we do it that way. Why is there nobody simply selling the service of helping you choose a car? Why can't I go, not to a dealer, but to someone with a selection of what he considers the best alternative cars for each niche, along with a few well informed advisors, literature on the cars, and a computer with an appropriate set of bookmarks?

Of course, such a firm would have to pay its bills. But why not do it by selling services rather than autombiles? Why not simply charge me fifty dollars an hour, or whatever other sum is consistent with their costs and my value, for helping me choose a car? They could then, as an additional service, help me search, online and elsewhere, for the seller with the best price. The advantages of such a firm have declined in recent years, as auto malls become more common--places where you can visit half a dozen dealers within a mile or so. But it still seems as though it would be useful.

I was reminded of this old puzzle recently in a different context. As I have mentioned here, not long ago I identified a high end smart phone that looked as though it was just what I wanted, bought it, and ended up sending it back. Even more recently I have identified another candidate, the HTC Advantage 7501. Judged by its specs, it is more or less the ultimate smart phone--quad band as a phone, triband as a 3G data device, with a full VGA screen, built in GPS, and its own micro hard drive. It is big for a cell phone--but not so big for a miniature computer. Its weight--about 13oz--is almost exactly the same as the weight of the Psion 5mx, the pda I carried for some years and became very fond of.

The Advantage is, however, an expensive device and a somewhat odd design (see the link for details), so I am unlikely to buy one unless I can first get my hands on it, and perhaps not then--there will be other high end smart phones coming out over the next year, so perhaps if I wait I can get something even better.

Which brings me back to my question. I live in Silicon Valley. Why isn't there, somewhere nearby, a showroom for high end cell phones, not limited to any single company, supporting itself by charging by the hour for access? Not only would that let me look at the Advantage, it would let me compare it to competitors. So far as I know no such thing exists, although I will be happy to be informed that I am mistaken.

The pattern I observe in both markets, showing services bundled with selling services, is a common one--indeed, in the economic literature, it is sometimes used to explain otherwise puzzling practices such as resale price maintenance. What I don't see is why that pattern is so common. After all, if I buy a car, or a cell phone, from a dealer that also provides a showroom, I'm paying for the showroom implicitly in the price of the car or phone. So why not separate out the two products and price them separately?

11 Comments:

If you have a showroom, you need to get a fairly large number of products to your inventory to be able to make comprehensive and useful comparisons. I can see two ways to get those products: a) buy them b) get them from producers. I'd say a) is not feasible in many cases because maintaining an representative inventory incurs large buying costs. In b) the problem is to get producers give you samples. For some producers such showrooms would increase sales and for some sales would decrease. Those firms which think giving you samples will decrease their sales or giving you samples will not be useful enough wont give you them. I'd expect over half of the firms to refuse because showrooms would direct sales to the best cars only, representing a small part of the market only. So, in b) it would be hard to get an inventory that is representative of the market.

I would like that service too. When I was last car-shopping I had some longshots -- probably not going to buy this but wanted to see it just in case. I know that the sales people are paid pretty much only by commissions on sales, so taking their time was hurting them (personally) unless I was sure there wouldn't be any other customers at the time. I wanted to be able to pay them for the service of showing me the car without any further strings, but they are just not set up for that. Pity, as that would be easier to offer than someone setting up a service-only shop and having to buy or rent all the cars. Why does any given institution have to be only one of service or sales?

What you want is speed dating for cellphone buyers. Good idea. We also need something like it for legal and financial services, insurance and medical and dental care, where everybody earns a lot of money by hiding the ball from the consumer.

Cars are like Fuller Brushes that I used to sell door-to-door. The decision to buy is not made rationally, and a good salesman can sell a person stuff he didn't know he needed in quantities that he will never use.

When I sold brushes in Silver Spring, I favored those houses with signs posted that said "no soliciting" knowing that a sucker lived inside, else why did her husband put up the sign? When the victim came in her nightgown and robe to the door at 8am, eyes half open, I ask her which “gift” she preferred: spoon caddy, pastry brush or crotch brush? When she asked “huh?” I’d repeat, “spoon caddy, pastry brush or vegetable brush”?

Once I got my foot in the door, and she told me she already had enough mops, brushes and brooms, I asked if she had a "belly-button" brush. Of course she didn’t. She also couldn’t avoid the specials of “24 toothbrushes for only $7.95,” and she sure couldn’t do the math needed to avoid the specials of “any two spray cans for $3.79 or any three for $5.49.” I made a very good living at it.

You appear to be a careful and rational buyer, but, as magicians know, scientists are just as easy, if not easier, to fool than the general public. There are still some scientists who believe in god and prayer, for Christ’s sake! And who is it that watches all those car commercials on TV and buys a new car he doesn’t need every three years?

The internet has recently brought some rationality to the purchase of real estate, cars and insurance, and even for drugs and medical and dental tourism, but the process sure needs to be streamlined, especially for things like medical and dental care, legal services and insurance, where the markets are so distorted, particularly where purchase of the product, like insurance, is compulsory.

As tobbic points out, if you want to show cars from different manufacturers, you need either a lot of capital investment or a lot of cooperation from producers -- which itself is a problem, as it might be perceived as biasing your recommendations. (That's why Consumer Reports buys its test vehicles, and doesn't accept gifts from manufacturers.) Perhaps the perceived value to the consumer of a multiple-maker showroom is less than would be needed to repay a decent return on the large capital investment.

It's interesting to compare this situation with real estate. Each seller and buyer works with a specific agent, but many of the agents in a geographic area can join a multiple listing service soclients of one agent can visit a house being sold by another agent, and if one such client buys it, the two agents split the commission. It's still somewhat in an agent's interest to steer buyers towards houses (s)he is selling and away from other agents' houses, but in a small community of realtors who know one another, there could be tit-for-tat retribution for such behavior.

So the puzzle is why real estate has done this while cars and cell phones haven't. For one thing, real estate is less capital-intensive -- it doesn't require a showroom or a lot of expensive stock. And real estate has a lot of small-volume sellers rather than a few large-volume sellers.

I wonder if something analogous to the car situation would happen if there were only a few large-volume buyers: the process of matching buyers with sellers would be taken over by the buyers themselves.

1) "I can avoid paying for that"people are irrationally cheap - even if it costs them more, they will often spend time an effort to avoid paying for something - in this case, they'll go to each seller instead. Things like coupons take advantage of these biases.

2) "that's not the kind of thing people pay for" people often have biases in what they are willing to pay for. For example, some people refuse to spend $X on a digital good not because they don't value it >$X but because they have some bias against paying for digital goods. New services would have to cross the conceptual barrier of "something worth paying for".

3) Marketing - who would even know to look for such a service if it existed. Marketing costs may be a large energy barrier.

It occurred to me after my previous post that other industries more closely resembling the auto industry do have multi-producer dealers: to wit, beds/mattresses, and large appliances (refrigerators, ranges, air conditioners, washing machines, etc.) You can walk into a large showroom and be shown models made by several different companies, the sale of any of which will earn a profit for the dealer.

These industries have a fairly small number of high-volume producers (though perhaps more producers than the auto industry); they're selling something that costs a lot (though not quite as much as cars), the items on display take up a fair amount of showroom space (though not quite as much as cars), so one would expect showrooms to be capital-intensive, as in the auto industry. So why have the markets for these items developed multi-producer dealers and showrooms, while the auto market hasn't?

As for a purchasing advising service, the reason there aren't many for cars is that people don't really want it. Most people don't buy cars rationally; they buy cars they think will impress others, and if they have kids, they buy cars that look safe.